Critical Illness Cover vs. Income Protection
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Critical Illness Cover vs. Income Protection
What is critical illness cover and what is covered by this insurance?
Some providers call it critical illness cover, or it can also be known as serious illness cover.
That should give you a clue.
In the UK, there are three major illnesses – forms of cancer, heart attack and stroke. Other elements under those can also be deemed critical. If you are diagnosed with one of these conditions, critical illness cover will pay you a lump sum.
When you set up the policy you would decide how much that lump sum should be, how long you want the cover for, and the purpose of that lump sum.
It’s there to lift the financial burden when you’re going through a difficult time. You may not know how long recovery will take, what the treatment involves or what support you’ll have around you.
The last thing you want to be thinking about is how to keep a roof over your head or pay the bills. Critical illness cover gives you that financial support, and you can do what you wish with it.
How does income protection work? What am I not covered for here?
It protects your income. I will look at the job my clients do, where they work and how senior their role is. It’s all about what their contract says should they be signed off long-term sick – how long would they receive their income for?
It’s important to look at your contract. Many people look at the base salary and not necessarily the benefits they get with it. If you’re only on statutory sick pay, it’s not much to survive on when you’ve got a mortgage and bills to pay.
Income protection won’t cover 100% of your salary. It’s designed to help pay your mortgage and bills, but there needs to be an incentive for you to return to work and get your full salary back.
There are lots of options in how you set it up, but ultimately it gives you about 60% to 70% of your income and can be paid for as long or short a time as you want. We work with your budget and financial situation. If you’ve got any savings to fall back on, how long will they last? Do you really want to dip into them if you’re long-term sick?
Don’t confuse critical illness with income protection. Critical illness protects against severe illnesses with a lump sum, while income protection could help with a longer term condition such as depression or a serious back injury. Perhaps you have a manual job, and if you can’t go into work, it will be there to protect your regular income.
How much income protection do I need?
That will come down to you as an individual and what your preferences are. If you’re single and you own your house, your income is crucial in sustaining the mortgage and bills. We’d look at what you’re earning and what your employer pays you.
If you’re self-employed, it’s even more important to have income protection because you’ve got no other fallback. You might have savings, but how long will they last for?
If you’re a couple, one party might still be going to work while the other is recovering. However, you’ve got a joint mortgage – a joint financial commitment. How long can you sustain that on just one income, especially if you’ve got dependents and cars to pay for?
It’s all very personal to you in terms of how much you need. We would have a detailed conversation and look carefully at your budget, your mortgage and what would happen if your income stopped.
How does critical illness cover differ from income protection? What are the pros and cons of each?
Ideally, you’d take them both. Critical illness pays a lump sum, and if you were diagnosed with a specific illness such as a form of cancer, it would pay you the sum you confirmed at the start of the policy.
It goes straight into your bank account, and you can then choose to use that for private medical care, to avoid a long waiting list perhaps. Or, you might decide to spend it on a holiday, because you’ve had the worst news ever. You might want to pay a chunk off your mortgage, or cover lots of little things.
Income protection will pay a regular monthly income, and that continues for as long as it takes you to get back to work full-time.
There are lots of income protection providers who offer physiotherapy schemes, return to work schemes, counselling or other services that apply to a specific injury or illness. They can help speed up your recovery time and get you back into work.
There are lots of differences – having both would give you the best of both worlds in a bad situation.
Who is critical illness cover for? Can anyone get this?
Critical illness cover is for everybody. Everybody should have it, in my opinion. It’s for anybody who wants to cover themselves should they develop a serious illness in the future.
It’s also about protecting you and your family. You don’t want to burden your loved ones, especially if you’re the main earner. You’ll want to be able to provide for your own health, and avoid putting pressure on your partner having to work longer hours, for example. If you’ve got children, who’s going to look after them while you’re in recovery?
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Do I need income protection insurance?
You don’t have to have it, but we certainly recommend it if you would only get statutory sick pay or need to rely on your savings. If you’re going to rely on family, how comfortable do you really feel about asking family members for financial help?
You bought a house to be independent. So to stay that way, we would absolutely recommend income protection.
Can you combine critical illness cover and income protection?
Absolutely. It’s personal to you. We’ve helped you get a mortgage, so we understand all the numbers involved.
We could look at combining critical illness and income protection in different ways. First, you can have critical illness cover, specifically for the term of your mortgage. If the mortgage finishes when you’re age 70, you might take critical illness cover to 70 for mortgage purposes.
You might aim for two times your salary as a payout – enough to cover the bills, support the family and pay for private care. You could have that as standalone cover, and then take income protection separately. We could go with the same insurance brand, or look at a different provider if there are certain benefits you wanted – such as physiotherapy services, counselling etc.
There can be benefits even when you’re not claiming. Some providers encourage you to download a health app. If you’re looking to lose weight they can help with a dietician, or support you to quit smoking.
The two types of cover can be combined, and still offer you lots of benefits, or you can take two separate policies. There’s no hard and fast rule. It’s how it suits you.
How much cover do I need for critical illness cover and income protection?
It’s personal to you and your preferences. You may already get good sick pay through work – if so, you might ask if you really need income protection. But an employer doesn’t have to provide those benefits. If you pay for it privately, you’ve got more control.
You can continuously review that with your advisor. If your circumstances change or you get a new job, you might not get those benefits anymore. You can then increase your cover. Lots of things can be done.
The cover you need will be dependent on the circumstances at the time. But once you’ve set something up, it stays the same throughout the lifetime of your policy, unless you want to have a review and change it.
What costs are involved with critical illness and income protection?
Some people might get a little nervous around cost, and we’ll certainly look at your budget. We consider your mortgage, your outgoings and your affordability.
Whatever budget you give us, we can work with it. You may need to come to a compromise, and it may not be the biggest policy payout if you’re paying a lesser premium.
There can also be nervousness, as we have to ask about your medical history. Existing medical history can impact the cost. Depending on your occupation and the risks there, income protection could be quite high – but you’ll probably need it the most.
Critical illness can be affected if you’ve got existing conditions. If, for argument’s sake, you’ve got Type 2 diabetes or stomach problems, that has to be factored into the medical underwriting.
Providers consider your age, your occupation, your existing medical history and your family history. They tend to ask if any close family members have had cancer, a heart attack or stroke, because that’s what the cover would pay out on.
If you’re likely to be a higher risk, your costs will go up. That’s something we research and confirm before you fully commit – you will know exactly what it’s going to look like. At that point, you can either reduce the level of cover to keep premiums within budget, or simply accept it.
Sometimes a provider may decline if they feel they can’t cover you at all. It’s best to be open and honest at the outset so that there’s no surprises further down the line.
Something is always better than nothing – protection is a safety net. At the end of the day, you want to be as financially independent as you can. We all know there’s less help from the government or local councils, and resources are getting thinner. The last thing you want to do is ask your family to help, because how long can they sustain that for?
You’ve demonstrated how a mortgage broker can help. Is there anything else we need to know?
Take your time on this, as it’s a big commitment. It’s just as big as a mortgage decision. When you’re doing your research, don’t just think about that mortgage. Think more widely about your backup plans. What contingencies and budgets can help protect you, your family and your house?
Don’t think of it as an add-on – think of it as part of your mortgage payments and just as important. Using a broker will make sure you have those honest conversations. We research the market – we’ll know which providers will accept your existing conditions and what it will cost.
If prices are high, we help you work through the most sensible level of cover – something is much better than nothing. Trying to do that yourself would be mind blowing, so, speak to an advisor and let’s take that off your hands.
Key Takeaways:
- Critical Illness Cover (CIC) provides a tax-free lump sum payout upon the diagnosis of specific severe illnesses, such as certain forms of cancer, a heart attack, or a stroke, offering immediate financial relief.
- Income Protection (IP) pays out a regular monthly income – typically 60% to 70% of your salary – and is designed to cover a broader range of long-term conditions, such as serious back injuries or depression, if you are unable to work.
- It is generally recommended to have both CIC and IP to gain the best coverage, as one provides a lump sum for immediate needs while the other provides a steady income stream for long-term recovery.
- The amount of cover needed is highly personal, depending on your individual circumstances, employment status, existing sick pay benefits, and financial commitments like a mortgage.
- The cost of cover is determined by your age, occupation, existing medical history, and family history, making it beneficial to use a broker to find suitable providers and ensure you get the most sensible level of cover within your budget.
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